11 Common Small Business Bookkeeping Mistakes (And How To Avoid Them)
Knowing how to avoid these 11 common small business bookkeeping mistakes will save you time and money and keep your business successful.
RELATED: What Is Bookkeeping — Explained
In this article:
- How Important Is Bookkeeping to a Business?
- Bookkeeping Mistakes That Small Business Owners Make
- Not Hiring an Experienced Bookkeeper and Professional Accountant
- Improper Record-Keeping of Financial Transactions
- Inaccurate Categorizing of Income and Expenses
- Inappropriate Petty Cash Management
- Neglecting Sales Tax
- Failure to Properly Classify Employees
- Neglecting to Review Financial Statements
- Improper Tracking of Reimbursable Expenses
- Failure to Reconcile Bank Statements and Accounts
- Poor Internal and External Communication
- Not Securing Data Backups
What to Avoid in Small Business Bookkeeping
How Important Is Bookkeeping to a Business?
Bookkeeping may seem like a mundane and tedious task compared to the overall appeal of owning and managing a small business. Yet, it’s a necessary practice you need to do right to keep your business afloat and successful.
To manage your business well, make sure to avoid the 11 most common bookkeeping mistakes.
Bookkeeping Mistakes That Small Business Owners Make
1. Not Hiring an Experienced Bookkeeper and Professional Accountant
Many business owners, regardless of the size of their business, don’t get bookkeeping and accounting help from professionals. Instead, they do all the work themselves or get someone inexperienced to do the job.
There’s a danger of messing up your financial records or missing tax deadlines when someone inexperienced handles bookkeeping and accounting.
Despite this, there are business owners who don’t see hiring bookkeepers and accountants as an investment but rather as a waste of money. It also speaks volumes about how they value their time.
Without the help of an experienced bookkeeper and a professional accountant, managing your finances can become tedious and time-consuming. Time is money, and business owners can free up their time to focus on growing their business if they know how to delegate tasks appropriately.
The most practical solution is to hire an experienced bookkeeper and a professional accountant. Bookkeepers will prepare your books and financial statements, while accountants will guide you through taxes and financial decisions.
Hiring trustworthy professionals to do the work for you ensures the following:
- Proper recording of your financial transactions
- Proper handling of your finances
- Compliance to financial and legal regulations
2. Improper Record-Keeping of Financial Transactions
A common small business bookkeeping mistake is improper receipt and record-keeping. Keeping track of your financial transactions accurately and saving your receipts will prepare you for tax filing and potential IRS auditing.
One of the small business bookkeeping tips you can apply is saving your receipts in electronic format so you can easily retrieve them from your database.
It’s the bookkeeper’s job to record all financial transactions and organize receipts accurately. Maintaining up-to-date records can save you from overpaying and penalties later on.
3. Inaccurate Categorizing of Income and Expenses
If you delegate your bookkeeping to someone who doesn’t know formal bookkeeping practices, they can commit this mistake.
For instance, a common error is categorizing transfers as income when these are non-business transactions that don’t affect your profit and loss.
It’s important to accurately differentiate income from expenses and record them correctly to ensure you see the right amount of profit. When you apply the right tax treatment for each income and expense category, you can also save money from taxes.
4. Inappropriate Petty Cash Management
Petty cash is the cash on hand you keep for your business. The amount may vary, but it often covers regular and unexpected expenses.
The problem is, some business owners aren’t able to track their petty cash and where they spend it.
That’s why you need to set up a system that’ll track your petty cash fund and disbursements. Some of the practical things you can do are:
- Get a petty cash box
- Log every amount you take from your petty cash fund and where you use it for
- Collect receipts for all your disbursements
Disbursement Definition: This refers to the payment of money from a particular fund (e.g., a petty cash fund).
5. Neglecting Sales Tax
One of the small business bookkeeping mistakes that come with hefty consequences is not accounting for and reporting sales tax.
Negligence in sales tax collection and reporting can cause you to pay penalties and fines. If you enter data incorrectly, you may end up with an inaccurate amount of total sales, and in turn, the wrong amount of sales taxes due.
Coordinate with your bookkeeper and accountant to make sure your business is complying by paying the right amount of sales tax on time.
6. Failure to Properly Classify Employees
Some small businesses employ both employees and contractors. If this is the case for you, be careful to properly classify them.
Making a mistake on this can cause you to misfile taxes and make overpayments. That’s why it’s important to always know and clarify the employment status of your people.
7. Neglecting to Review Financial Statements
There are business owners who focus too much on growing their business that they neglect to review their financial statements. It’s very important to keep yourself updated on how your company is doing financial-wise so you can make the right decisions.
Ask your bookkeeper to explain everything recorded in your financial statements. Make it a habit to go through them regularly so you’ll have a good understanding of how your business is doing.
8. Improper Tracking of Reimbursable Expenses
There are times when paying for business expenses out of your own pocket is unavoidable, and one small business bookkeeping mistake is improper tracking of reimbursable expenses.
If you fail to account for these, you risk losing money and qualifying for tax deductions.
The solution is to create a recording system that makes it easy for your company to consistently track and log all reimbursable expenses. This way, you can separate and protect your personal finances.
9. Failure to Reconcile Bank Statements and Accounts
The next small business bookkeeping mistake is somewhat related to the previous one. If you don’t have a separate bank account for your personal and business finances, it can become an issue later on.
Operating on a single bank account can mix up your personal and official business spending. When auditing comes, the IRS may ask you to provide a complete record of your purely business-related spending.
The best practice is to have separate bank accounts for personal and official business. Always make sure that you reconcile your bank statements and accounts at the end of each month.
This will help you correctly identify the source of your funds and avoid potential auditing issues.
10. Poor Internal and External Communication
Even if you’re operating a small business, it’s still important to foster good communication between your bookkeeper, workers, and suppliers. Involve and integrate your bookkeeper with the goings-on within your business.
Not only can bookkeepers keep track of your financial transactions, but they can also manage your payroll, budget, and inventory. They must have open communication with the people they work with so if any issues arise, they can directly speak to the concerned party.
This can also help the bookkeeper create accurate financial statements that reflect the operational situation and needs of your business.
11. Not Securing Data Backups
Bookkeepers operate both on manual and using a computerized system. Yet, it’s still very important to always keep a backup of your company data.
It’s good to prepare for the event that an unforeseen issue causes you to lose your data. Having backups (both for your files on paper and digital files) are essential for your business to bounce back faster after encountering a loss.
Committing these small business bookkeeping mistakes can be detrimental to the success of your operations. Learn from these common bookkeeping mistakes and be careful to avoid them.
Always choosing to go through the right process — no matter how tedious it is — will reap the good results later on. The best part is, you won’t have to subject yourself to unnecessary stress and waste of resources because you did things right the first time.
What small business mistakes have you learned? Share them with us in the comments section below.